Two state regulators are presenting contrasting descriptions of certain events surrounding the controversial approval of the sale of a workers' compensation insurer that was majority-owned by Berkshire Hathaway Inc.
As part of an effort to buy a group of workers' comp companies he co-founded, Applied Underwriters Inc. CEO Steve Menzies needed regulatory approvals in Iowa, Texas and California.
Texas signed off on the deal and Menzies received a conditional approval from Iowa in late September, but California regulators had not taken action by the drop-dead date of Sept. 30 listed in the stock purchase agreement. A press release from the New Mexico Office of Superintendent of Insurance said the California Department of Insurance had indicated on Sept. 27 that it would not be able to reach a decision to either approve or disapprove the sale in the following three days.
Menzies obtained a 10-day extension and sought to merge the California subsidiary in question, California Insurance Co., with a newly formed entity called California Insurance Co. II that was domiciled in New Mexico.
A public hearing to approve the transaction was then held in New Mexico on Oct. 9; within hours the state's regulator approved the deal. California, however, on Oct. 21 said it was denying the change-in-control application for California Insurance Co. because of the move to merge it into the New Mexico-domiciled entity without approval in the Golden State.
The New Mexico Office of Superintendent of Insurance in a press release said California Insurance Co. would have been "placed in runout" and company employees would be out of work if the deal had not closed. It also noted that there was a conference call prior to the Oct. 9 hearing in which regulators from New Mexico, Texas and California regulators participated.
According to the New Mexico regulator, the California Department of Insurance "failed to articulate" any basis for denying the proposed merger under New Mexico law and "agreed" that the deal "presented no risks to California policyholders."
Michael Soller, a spokesperson for the California Department of Insurance, however, took issue with a portion of that statement.
"As with all states, New Mexico has its own process and standards for reviewing insurance transactions subject to jurisdiction," Soller said in an email to S&P Global Market Intelligence. "However, to be clear, at no time did California agree that the proposed merger presented no risk to California policyholders or that the prior approval for the merger by California was not required."
Soller said California law requires prior approval of "any sale or merger" of a California domestic insurance company, "regardless of the actions" taken by other states.
California could have objected to the deal during the public hearing in New Mexico, but chose not to do so. In an Oct. 18 letter to Menzies' lawyer, Jeffrey Silver, the state's regulator said its choice to "monitor the proceeding" without objecting did not mean it was relinquishing its authority to review the transaction and make an approval decision.
Moving to New Mexico
Menzies has told S&P Global Market Intelligence that he views the acquisition as "fully completed" and "final." He plans to center all of Applied Underwriters' insurance companies in New Mexico.
The order issued by the Iowa insurance division that approved the Form A in that state included the condition that Menzies would cause the Iowa subsidiaries to "re-domesticate in another jurisdiction" within one year of the transaction's closing date. The four Iowa subsidiaries are Applied Underwriters Captive Risk Assurance Co. Inc., Continental Indemnity Co., Illinois Insurance Co. and Pennsylvania Insurance Co.
Menzies said the company had been solicited by regulators "all across the U.S." to move to their states and decided to move to New Mexico after a "thorough selection process" that included reviewing economic incentives.